Class 2: The Business Model

MG106 Strategic Management

José Ignacio González Rojas
j.i.gonzalez-rojas@lse.ac.uk

London School of Economics and Political Science

June 25, 2025

Today’s Plan 🎯

Four Questions to Crack

1️⃣ What made Blockbuster dominant?

2️⃣ How did Netflix enter and how did Blockbuster react?

3️⃣ How did Netflix evolve its model?

4️⃣ Why did Blockbuster’s response fail?

Framework: WHO-WHAT-HOW

Task: 15 minutes, discuss all questions in teams 🕐

Go! Discuss in Teams 🚀

Remember: Use WHO-WHAT-HOW

Question 1: The Empire 👑

Let’s Map Blockbuster’s Model

What did you find?

WHO were their customers? 🤔

Think: What triggered a visit?

WHAT value did they offer? 💰

Was it just movies?

HOW did they deliver? 🏪

Count the costs…

Build the complete WHO-WHAT-HOW picture 📊

Blockbuster’s Model Revealed 💡

WHO 👥

  • Impulse renters
  • “Movie night” families
  • 10-minute drive radius

WHAT 🎬

  • Instant gratification
  • New releases (70%)
  • 2-3 day rentals
  • Late fees = $600M/year 💸

HOW 🏢

  • 9,000+ stores
  • Prime real estate
  • 60,000 employees
  • Local inventory × 9,000

Outside option? Movie theater @ $10-15/person 🍿

This model printed money… until it didn’t

Question 2: Enter the Challenger ⚔️

Netflix 1.0: What Was Their Plan?

Discuss: Their Initial Strategy

How did Netflix answer WHO-WHAT-HOW? 📝

Hint: Look at 1997-1999

The Copycat Strategy 🐱

What Netflix Tried First

Same as Blockbuster ✅

  • $4 per rental
  • $2 shipping
  • Late fees
  • Pay per transaction

Different ❌

  • DVD only (2% of market!)
  • Mail delivery (3-5 days)
  • Website ordering
  • Zero stores

Your verdict? Would this work? 🤷

Let’s Think This Through 🧠

Quick poll: Who wins? 🗳️

10-14 day cycle vs. 10-minute drive

Question 3: The Pivot 🔄

How Did Netflix Transform?

Track the Evolution

What changes did they make? 📈

List them out…

Evolution Tracker 🎯

Phase Change Why? Impact
1999 Subscription model Kill transaction friction 💔 Still failed
2000 Unlimited + No late fees Change the game 🎯 Breakthrough!
2001 Recommendation engine Drive to catalog 💰 Lower costs
2002 Distribution centers Overnight delivery 🚀 Game over

Key question: Why did EACH change matter? 🤔

The Magic Moment ✨

Discuss: The Breakthrough

What was revolutionary about:

“Unlimited rentals, no late fees, 3 at home”?

🏠 🎬 🎬 🎬

Think: How did this change customer psychology? 🧠

The System Effect 🔗

See it? Every piece reinforces the others! 🎯

Quick Exercise 🏃

Connect the Dots

How did these work together?

📋 Queue → 🤖 Recommendations → 🏭 Distribution → 🤝 Studio deals

Hint: Think inventory management 📦

Question 4: The Counterstrike ⚔️

Blockbuster Fights Back

When did they respond?

Timeline check! 📅

Spoiler: Really, really late 🐌

The Denial Timeline 🙈

2002: “Online rental? Niche market” 🙄

2004: Finally launches online (copy Netflix) 🐢

2005: Drops late fees (bye $600M!) 💸

2007: Total Access (online + stores) 🏪+💻

2010: 💀 RIP

Question: Could they have won? 🤔

The Fatal Math Problem 🧮

Let’s Calculate Together

Netflix Costs 💚

  • Warehouses: ???
  • Staff: ~2,000
  • Inventory: Centralized
  • Flexibility: High

Blockbuster Costs 💔

  • Store rent: × 9,000
  • Staff: 60,000
  • Inventory: × 9,000
  • Flexibility: Zero

Can you compete when your costs are 10x higher? 📊

The Identity Trap 🪤

Why Blockbuster Couldn’t Change

The lesson? You can’t be two things at once 🎭

Time to Synthesize 🧩

Business Model Showdown

Blockbuster 🏪 Netflix 📮
Customer Job “I need entertainment NOW” “I want movies ready always”
Revenue Transaction + penalties Subscription
Assets 9,000 stores (trap!) Algorithms + warehouses
Inventory Local × 9,000 National pool
Evolution Couldn’t change Constantly adapted

Critical insight: One piece changes = ALL pieces change 🔄

Key Takeaways 💡

What Did We Learn?

1. Systems beat features 🔗

  • Netflix: Every change reinforced others
  • Blockbuster: Added features to broken model

2. Assets can imprison 🏢➡️⛓️

  • 9,000 stores became anchors
  • Fixed costs killed flexibility

3. Different jobs = Different models 🎯

  • Impulse ≠ Planning
  • Can’t serve both with one model

4. Speed matters 🏃‍♂️

  • Netflix: Failed fast, learned faster
  • Blockbuster: Denied, delayed, died

For Tomorrow 📚

Cola Wars: Coke vs. Pepsi 🥤

Your mission:

  • Read the case thoroughly
  • Focus on Porter’s Five Forces 💪
  • Think: How can two giants BOTH win?

Key question: What makes an industry attractive? 🤔

See you tomorrow!

Bring your competitive analysis hat 🎩